4Court-Mandated School Finance Reform: What Do the New Dollars Buy?

Margaret E. Goertz and Gary Natriello

As states reformed their education funding systems in the 1970s and increased their share of K-12 education funding, policymakers raised several concerns about how districts would use their new state aid. The first concern was that districts would use a portion of their increased state aid for tax relief, rather than for increased education spending, thus limiting the impact of school finance reform on expenditure equity and educational program improvement. The second concern was that the dollars allocated to education would be used primarily to increase teachers' salaries. Daniel Patrick Moynihan argued that "teachers will benefit. Any increase in school expenditures will in the first instance accrue to teachers, who receive about 68 percent of the operating expenditures of elementary and secondary schools" (Moynihan, 1972:75). Finally, state legislators worried that districts receiving large aid increases, particularly urban districts, would not use these new funds efficiently. One reaction to the 1990 school finance reform in New Jersey reflected this view: "Frankly it is hard to avoid the suspicion that, at this frenzied pace, the money won't be carefully directed, but will be shoveled hastily into the bottomless pit of New Jersey's disaster areas" (Sacks, 1990:A14).

In spite of these ongoing concerns, we know little about whether and how school finance reform translates into enhanced educational services. This chapter uses data from intensive case studies of Kentucky, New Jersey, and Texas to answer three sets of questions about the impact of court-mandated school finance reforms on both education revenues and services:

1.

How did low- and high-wealth districts respond to court-mandated state

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MARGARET E. GOERTZ AND GARY NATRIELLO
4
Court-Mandated School Finance Reform:
What Do the New Dollars Buy?
Margaret E. Goertz and Gary Natriello
As states reformed their education funding systems in the 1970s and in-
creased their share of K-12 education funding, policymakers raised several con-
cerns about how districts would use their new state aid. The first concern was
that districts would use a portion of their increased state aid for tax relief, rather
than for increased education spending, thus limiting the impact of school finance
reform on expenditure equity and educational program improvement. The sec-
ond concern was that the dollars allocated to education would be used primarily
to increase teachers’ salaries. Daniel Patrick Moynihan argued that “teachers
will benefit. Any increase in school expenditures will in the first instance accrue
to teachers, who receive about 68 percent of the operating expenditures of el-
ementary and secondary schools” (Moynihan, 1972:75). Finally, state legisla-
tors worried that districts receiving large aid increases, particularly urban dis-
tricts, would not use these new funds efficiently. One reaction to the 1990 school
finance reform in New Jersey reflected this view: “Frankly it is hard to avoid the
suspicion that, at this frenzied pace, the money won’t be carefully directed, but
will be shoveled hastily into the bottomless pit of New Jersey’s disaster areas”
(Sacks, 1990:A14).
In spite of these ongoing concerns, we know little about whether and how
school finance reform translates into enhanced educational services. This chapter
uses data from intensive case studies of Kentucky, New Jersey, and Texas to
answer three sets of questions about the impact of court-mandated school finance
reforms on both education revenues and services:
1. How did low- and high-wealth districts respond to court-mandated state
99

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school finance reforms in the 1990s? Did the level of revenues available to
districts from state and local sources change? By how much and why? Did
expenditure patterns change? What did the new dollars buy?
2. What factors influenced these changes in revenues and expenditure deci-
sions? What roles did state fiscal and nonfiscal education policies, district con-
text, and district fiscal and administrative capacities play?
3. What are the implications of these findings for school finance reform
policy and for research on the impact of finance reform policies?
Although we present evidence on what the new dollars that flowed to school
districts as the result of court-ordered finance reforms enabled districts to pur-
chase, we cannot address the ultimate question of the impact of finance reforms
on student performance. None of the studies considered here collected student
achievement data. In New Jersey and Kentucky, changes in state testing pro-
grams during the study period make pre- and post-study period comparisons
impossible.
The chapter begins with a summary of three models of district response to
changes in state education aid, followed by a brief description of the methodol-
ogy used in the three state case studies. The next three sections report on (1) the
fiscal response of districts in the three states to their 1990 school finance reform
laws, (2) how districts chose to allocate new state aid dollars, and (3) what
districts bought with these new dollars. In the concluding section, we examine
the implications of our findings for policy and research. Throughout, our focus is
on school finance equity as it was defined in court decisions during the early
1990s; we cannot address more recent issues of finance adequacy that are emerg-
ing in these and other states. Accordingly, for the most part, we employ theories
and measures developed for equity analyses.
MODELS OF DISTRICT RESPONSE TO CHANGES IN STATE AID
Researchers have developed three models that are intended to explain how
school districts respond to changes in available resources: intergovernmental
grant theory, expenditure models, and decision-making models. This chapter
relies on intergovernmental grant theory to understand how districts respond to
changes in state aid; it makes use of expenditure models and decision-making
models to interpret district responses to increases in resources. Clearly, the court
cases reviewed here that attempted to change the way states raise and allocate
dollars to districts are only one of a number of factors that affected district
expenditure patterns during the early 1990s. Although we acknowledge that
other factors also affected district actions, we do not review data on how spend-
ing might have changed in the absence of court cases, and so we restrict our
analyses primarily to the impact of the court cases.

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MARGARET E. GOERTZ AND GARY NATRIELLO
Intergovernmental Grant Theory
State or federal governments provide grants to local school districts in order
to change the way they allocate resources. Unrestricted general aid is designed to
increase the amount that communities spend on education generally; categorical
grants are used to ensure that school districts provide services deemed important
by the state or federal government. Unrestricted general aid increases a school
district’s revenues, but districts are free to use the new dollars in any way they see
fit—to supplant local revenues and thereby reduce tax rates, or to increase overall
education spending, thus providing more or better services.
Past research on the effects of unrestricted intergovernmental grants for
education has shown that school district spending increased by only a portion of
the increase in state aid. The rest is devoted to local property tax relief. Tsang
and Levin (1983) reviewed much of the research conducted in the 1960s and
1970s on district response to changes in unrestricted general education aid. By
examining the different studies and different states, they found that, on average,
school districts used about half of the increases in state general education aid on
educational programs and about half to reduce local tax rates. Districts that
received large increases in state aid as part of New Jersey’s 1975 education
finance reform, however, directed most of their new funds—about 85 percent on
average—to education rather than to tax relief (Goertz, 1979). Districts with high
levels of fiscal burden or relatively high spending levels took more tax relief than
less-burdened or lower-spending communities. In her study of New York, Adams
(1980) also found that high-wealth districts were more likely to use increased
state aid to reduce local tax burdens than their low-wealth neighbors.
Expenditure Models
How do school districts allocate these expenditure increases? Do they use
new dollars to raise teacher salaries, to increase the intensity of instructional
services, to expand the “administrative blob,” or for other activities? Cross-
sectional analyses of districts with different spending levels (Alexander, 1974;
Barro and Carroll, 1975; Hartman, 1988; Odden et al., 1979) and longitudinal
studies of district response to major school finance reforms in California (Kirst,
1977) and New Jersey (Goertz, 1979) generated the following findings about
how districts use increases in their education budgets.
First, expenditures for administration increased at a lower rate than total
spending. Second, while districts spend a comparable percent of their budgets on
instruction—around the national average of 60 percent of operating budgets—
higher-spending districts purchase a different mix of instructional services than
low-spending districts. As spending levels increase within a state, districts tend
to use the additional money to hire more teachers and to increase nonteaching
components of the budget, such as specialists and supplies and equipment. As a

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result, high-spending districts have lower pupil/teacher and pupil/staff ratios than
their lower-spending neighbors.
Third, contrary to the Moynihan thesis, only a small portion of each addi-
tional dollar is spent on higher teacher salaries. Alexander (1974) found that less
than half and Barro and Carroll (1975) found that less than one-third of increased
expenditures on teachers were used to increase salaries. Kirst (1977) found that
under Senate Bill (SB) 90, the increase in teachers salaries in the poorest Califor-
nia districts actually fell below the average increase in the state (8.24 percent
versus 8.45 percent). Goertz (1979) found similar patterns in the aftermath of
New Jersey’s 1975 finance reform law. Salary increases in districts that received
at least a 25 percent increase in state aid were lower than the statewide increase:
11.8 percent versus 13.2 percent for a two-year period.
Decision-Making Models
We know far more about how school districts allocate increases in state aid
than why districts make these tax and spending decisions. Kirst (1977) examined
the decision-making process of five districts in the wake of SB-90 and deter-
mined that an organizational model (rather than an economic or political model)
best explained the allocation decisions in these districts. Searches for alternative
uses of new dollars were limited to past expenditure patterns and current educa-
tional approaches in these and neighboring districts. The particular types of new
instructional personnel and programs funded by these five California districts
reflected district priorities and pent-up demands—programs that had been con-
sidered but not funded in the past.
Firestone and colleagues (1997) use a modified version of Firestone’s (1989)
“ecology of games” to explain how school districts use new resources generated
by school finance reforms. School finance reform comprises at least four games:
the court, state politics, state policy, and local administration. Each game is
played on its own terms, but each depends on other games for resources, regula-
tions, demands, and so forth. In determining how to spend new state aid dollars,
districts respond to two contexts—their community and state policy. The com-
munity provides students and funding based on available property wealth and
community support. The state policy context includes fiscal policy, nonfiscal
policies (such as state standards and assessments), and the ways that the state
administers these policies (including oversight and technical assistance). These
two contexts are mediated by the school district’s own context, including its
administrative culture, existing spending levels and patterns, and the status of
district capacities (personnel, teaching, social services, and facilities) before the
school finance court decision.
These approaches are consistent with institutional theories that argue that
organizational decisions are driven by a need to maintain legitimacy in the wider
environment (Meyer and Rowan, 1977; Powell and DiMaggio, 1991). From this

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MARGARET E. GOERTZ AND GARY NATRIELLO
perspective, organizations such as school districts may be even more responsive
to immediate external forces related to efficacy and efficiency as long as doing so
does not violate the expectations and assumptions held by important elements in
the external environment.
In summary, prior research has shown that some new state aid is used for tax
relief. But, contrary to Moynihan’s hypothesis, in the 1970s new dollars were not
absorbed disproportionately by salaries for existing teachers, thereby increasing
the price of existing services. Rather, it appears from these studies that low-
spending districts modeled the behavior of the wealthier districts; that is, they did
“more of the same” with their new state aid dollars—lowered class sizes, pro-
vided additional support services, and purchased more instructional materials and
equipment. Specific district decisions, however, reflect local context.
METHODOLOGY
This chapter draws on studies of Kentucky, New Jersey, and Texas con-
ducted by the Finance Center of the Consortium for Policy Research in Education
(CPRE) and the Center for Education Policy Analysis—New Jersey (CEPA-NJ)
at Rutgers University in the aftermath of these states’ court-mandated school
finance reforms.1 The heart of these studies is a set of qualitative case studies
that examined district response to reform in a small number of school districts in
each state: two low-wealth and two high-wealth districts each in Kentucky and
Texas; six low-wealth urban, two moderate-wealth suburban, and four high-
wealth districts in New Jersey. The districts were selected to reflect variation in
community wealth, district size, urbanicity, and geographic location within each
state. Researchers interviewed district superintendents, finance officers, and
other central office staff and analyzed annual financial reports and budgets in
each of the study districts. District-level data were supplemented in New Jersey
with interviews and surveys of staff in a sample of schools in each of the study
districts.
All three studies used 1989-90 as a base year. This was the year immediately
preceding the implementation of new finance laws in Kentucky and Texas, and
two years preceding the implementation of New Jersey’s reform law. The Ken-
tucky and Texas cases tracked districts through 1992-93; the New Jersey research
continued through 1993-94. The researchers also used statewide databases to
examine changes in the overall equity of these states’ funding systems between
1989-90 and 1992-93 using traditional school finance equity measures (Berne
and Stiefel, 1984).
These studies have several limitations that affect the analyses presented in
this chapter. First, the sample of case study districts is not representative of
districts in any of the three states, so we cannot generalize from the case study
data to all districts in each state. The qualitative data do provide insights, how-
ever, into how and why poor and wealthy districts respond to major changes in

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school funding laws. We have analyzed statewide data wherever possible to see
whether these patterns hold over a larger number of districts. Second, we have
limited data on the impact of finance reforms on schools in New Jersey, and none
in either Kentucky or Texas. The school-level data in New Jersey are drawn
primarily from a teacher survey that focused on changes in curriculum, instruc-
tion, and teaching conditions; the survey was supplemented by interviews with
the school principals, in four to eight schools in each of the study districts.
IMPACT OF SCHOOL FINANCE REFORMS ON
SCHOOL DISTRICT REVENUES
The school finance laws enacted in Kentucky, New Jersey, and Texas were
designed to respond to their respective court mandates. Court decisions in Ken-
tucky (Rose v. Council for Better Education, 1989) and New Jersey (Abbott v.
Burke, 1990) emphasized student equity and adequacy.2 The Kentucky court
called for a funding system that was “adequate” and “substantially uniform,” and
that would provide “equal education opportunity” to all children, but would allow
local districts to supplement the state’s uniform, equal educational effort (Adams
and White, 1997). The New Jersey decision focused on inequities between the
state’s poor urban and wealthy suburban communities, and required the legisla-
ture to equalize education spending between these two groups of school districts.
In contrast, the Texas decision (Edgewood v. Kirby, 1989) emphasized fiscal
neutrality, requiring that all districts have “substantially equal access to similar
revenues per pupil at similar levels of tax effort.”3
Table 4-1 presents the key components of the basic education funding for-
mulas that were implemented after the court decisions and compares them to the
systems in place prior to the courts’ actions. Both Kentucky and New Jersey
made major changes to their school funding formulas. Kentucky replaced what
was essentially a flat grant system based on classroom units4 with a cost-shared
foundation formula5 and an optional guaranteed tax base.6 New Jersey substi-
tuted a foundation formula for a guaranteed tax base system. Texas did not make
structural changes to its allocation formula but substantially increased the foun-
dation levels, required local contribution, and guaranteed yield. The major change
was the establishment of county education districts (CEDs) to raise local property
taxes, essentially creating a county-level recapture provision.7
In addition, all three states increased their support of programs for special
needs students. Kentucky and Texas included program weights for students with
disabilities, at-risk students, and students with limited English proficiency (Texas
only) in their foundation formulas. Kentucky also added separate categorical
grant programs for extended school services, preschool for at-risk children, and
family resource and youth service centers. New Jersey retained separate cat-
egorical aid formulas for special education, at-risk, and limited English proficient
students but substantially increased funding of these programs.

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Changes in State Aid
All three states increased state aid to education significantly between 1989-
90 (pre-reform) and 1992-93 (post-reform), ranging from 31 percent in New
Jersey to 35 percent in Kentucky and Texas. As shown in Table 4-2, most of the
new aid was targeted on low-wealth school districts. In Kentucky, for example,
the lowest-wealth quintile received, on average, $1,145 per pupil more in state
aid—a 66 percent increase—compared with a $190 per pupil increase in the
highest-wealth quintile (an 11 percent change). Similarly, districts in the two
lowest-wealth deciles in New Jersey saw their state aid allocations increase, on
average, $2,151 and $2,009 per pupil—a 46 percent and 54 percent gain, respec-
tively. The two highest-wealth deciles lost small amounts of state aid, represent-
ing less than 5 percent of their state aid. In Texas, state aid increased $1,219 per
pupil in the lowest-wealth decile, a 48 percent jump. State aid losses in the
higher-wealth districts were aggravated by the loss of local property tax revenues
through the county equalization system. Evans, Murray, and Schwab (Chapter 3,
this volume) found similar patterns in their analysis of 16 states with court-
mandated school finance reform.
Low-wealth communities were not the only winners in these states. Districts
in the second and third quintiles in Kentucky and in the third through sixth deciles
in New Jersey and Texas also received large dollar and percentage increases in
state aid. The gains result from the operation of these states’ new foundation
formulas; in Kentucky and New Jersey, the post-reform foundation level was
above the average spending level of the middle-wealth districts prior to reform.
Middle-wealth districts in Kentucky and Texas also benefited from the guaran-
teed tax base (GTB) add-on provisions in their formulas.
District Response to State Formula Changes
The impact of increased state education aid on school district spending is
influenced by three factors: the size of the state aid increase, local taxing deci-
sions, and the limits imposed by tax or expenditure caps. Our review of earlier
research studies showed that increases in state aid do not automatically flow to
educational services for students. Other demands are made on these dollars,
including a press for tax relief. Table 4-2 shows, however, that school districts in
all categories of wealth in the three study states generally increased their local tax
rates in response to changes in state funding formulas. Three factors account for
these changes: (1) required local effort provisions in the state aid laws, (2) fiscal
incentives to spend above the foundation level, and (3) demographic, cost, and
programmatic pressures on school districts.
All three states enacted foundation formulas that require districts to contrib-
ute a specified amount of local revenues, often called a required local effort
(RLE). Required local efforts are usually specified as minimum tax rates, which
are applied to local property tax bases and, in some states, to local income wealth.

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TABLE 4-1 Basic Education Funding Formulas in Effect, 1992-93: Kentucky,
New Jersey, and Texas
Base Tier 1 Tier 2
Kentucky: Kentucky Education Reform Act (1990)
Foundation formula. (optional) Up to 115% of the (optional) Up to 130% of
Foundation level at $2,420; foundation level; equalized at the Base plus Tier I;
required local effort of 3 150% of property wealth. no equalization.
mills. Vote required.
New Jersey: Quality Education Act (1990, as amended in 1991)
Foundation formula. (optional) Up to district budget
Foundation level at about cap; no equalization.
$6,100 per pupil (K-5); Vote required.
required local effort of
about 11.6 mills.
Texas: Senate Bill 351 (1991)
Foundation formula. (optional) Guaranteed yield of (optional) Between 12.7
Foundation level at $2,400 $22.50 per WADA ($29.24/ADA) and 15 mills. No
per WADAa (which is per 0.1 mills between 8.2 and equalization. Vote
equal to $3,441 per ADA); 12.7 mills. Vote required. required. Recapture
required local effort of through County
8.2 mills. Education Districts.
WADA, weighted average daily attendance; ADA, average daily attendance.
aStudent counts are modified by special program (e.g., compensatory education) or instructional
arrangement (e.g., grade level) weights.
The reform laws in both Kentucky and Texas increased districts’ RLEs substan-
tially: from 0 to 3 mills in Kentucky and from 3.4 to 8.2 mills in Texas. Nearly
half of the school districts in Kentucky had been taxing below their RLE prior to
the Kentucky Education Reform Act of 1990 (KERA). Thus, they had to raise
their local tax rates to meet the new state minimum (Adams and White, 1997).
The situation was different in Texas, where most districts were already taxing at
close to the new effort level. Many high-wealth districts had to increase their
taxes, however, to meet the requirements of the county equalization program. In
New Jersey, the “fair share” requirement of the Quality Education Act (QEA),
coupled with budget caps, put a floor on how much tax relief the high-taxing,
poor urban districts could take.
Kentucky and Texas incorporated voluntary GTB add-ons in their new fund-

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MARGARET E. GOERTZ AND GARY NATRIELLO
Changes in State Aid
Formula It Replaced (1989-90 to 1991-92)
Essentially a flat grant based on classroom units State aid increased $541 million or 35%.
tied to a state minimum salary schedule.
Guaranteed tax base formula. Expenditures State aid increased $1.02 billion or 31%.
equalized up to 65th percentile; equalized at
128% of property wealth.
Same formula structure with lower foundation State aid increased $2.105 billion, or
amount ($1,477) and required local effort 35%.
(about 3.4 mills), and lower Tier 1 guaranteed
yield (about $18.87) and tax effort limit
(between about 3.4 and 5.75 mills).
SOURCES: Table compiled from data from the following: Kentucky (Adams and White, 1997;
Koch and Willis, 1993); New Jersey (Goertz, 1994); Texas (Picus and Toenjes, 1994; Texas Educa-
tion Agency, 1991, 1993).
ing programs as an incentive for districts to spend above the minimum foundation
level. This provision was successful in both states. All but two of Kentucky’s
176 school districts participated in the Tier 1 program to some degree (Koch and
Willis, 1993). Many poor districts in Texas also increased their tax rates to take
advantage of that state’s second tier of aid (Picus and Toenjes, 1994). In fact, the
level of participation in both states was so high that demands for additional state
aid exceeded the funds allocated for the add-on provision.8 This led both states
to reduce funding allocations through proration. In Texas, the proration repre-
sented nearly 10 percent of state aid in 1992-93, leading many districts to raise
their tax rates even higher (Picus and Toenjes, 1994).
Finally, district taxing decisions reflected the interaction of changes in state
aid and local contexts. For example, high-wealth districts in New Jersey and

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TABLE 4-2 Changes in State Aid per Pupil, Local Revenues per Pupil, Tax
Rates (in mills), and Total Revenues per Pupil, 1989-90 to 1992-93: Kentucky,
New Jersey, and Texas
Kentucky a
Change Change Change Change
Wealth in State in Tax in Local in Total
Decilec Aid Rate Revenue Revenue
1
2 $1145 1.6 $ 211 $1355
3
4 825 1.4 252 1077
5
6 653 1.3 276 929
7
8 405 1.0 385 790
9
10 190 1.2 328 518
State average 639 1.3 288 927
Change in Property
Value per Pupil +16.7%
aData were reported in quintiles, rather than deciles. Revenues do not include transportation and
categorical grant programs, such as preschool and extended school programs and include intrastate
cost adjustments.
bChange between 1988-89 and 1992-93.
cEach decile (and quintile) has approximately the same number of students.
Texas that lost state aid (and in the case of Texas, lost local revenue through
county equalization) raised their tax rates to offset these reductions. They raised
their rates even higher to address growing enrollments, increased program costs
(due to salary settlements, inflation, and the growth in the number of special
needs students), and/or declining or stagnant property valuations. For example,
the four high-wealth districts in the New Jersey study raised their local taxes so
they could maintain growth in their school budgets (adjusted for enrollment
growth) of between 2 percent and 6 percent a year (Firestone et al., 1997). One of
the two high-wealth districts in the Texas sample raised its taxes 33 percent. The
funds available after accounting for a shortfall in state revenues were used to
support its strategic plan for school improvement. The second high-wealth district
was forced to increase its taxes just to maintain its spending level (Picus, 1994).
In New Jersey, a poor economic climate in the early 1990s depressed prop-
erty valuations and dampened public support of rising school budgets, especially

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MARGARET E. GOERTZ AND GARY NATRIELLO
New Jersey Texas
High-wealth and middle-wealth districts One high-wealth district deferred plans for
reported minor delays in purchases of purchasing new technology. One low-wealth
materials and resources. Low-wealth district devoted about $1 million to technology
districts reported modest increases in the improvements, partially for instructional
purchase of such materials. Respondents purposes and partially for management
in low-wealth districts reported that they systems. None of the districts indicated that
could purchase the supporting materials it would use funds to purchase materials to
for new textbook series for the first time supplement state-adopted textbooks.
in years.
Low-wealth districts added elective Both low-wealth districts planned
offerings to the curriculum, established programmatic changes. One low-wealth
new programs for students in need of district made organizational changes to
special assistance, added more challenging improve the quality and quantity of staff
programs for students who could benefit development for teachers. The other low-
from them, and modified the curriculum wealth district was able to use new general
to respond to the new high school revenues to support programs previously
graduation test. High-wealth and supported with Chapter 1 funds; the released
middle-wealth districts made less dramatic Chapter 1 funds were used to establish a
changes, at times involving minor parent-involvement program. New funds
reductions. Low-wealth districts also were also used to establish an Instructional
invested in extended day programs (e.g., Monitoring Program which placed central
after-school homework centers), office staff in school sites on a regular basis
extracurricular activities (e.g., high school and to establish a year-round education
clubs), early childhood education (e.g., program to provide remedial education to
full-day kindergarten, pre-kindergarten), students having difficulty. One high-wealth
and health and social services (e.g., parent district that experienced a funding
programs, counselors, school-based health reduction reduced central office staff and
centers). High-wealth and middle-wealth hired fewer replacement teachers. The
districts made few or no changes in these other high-wealth district that received new
areas. money from a local property tax increase
initiated curriculum improvement activities at
the school site level.
One low-wealth district made facilities One low-wealth district used most of its new
construction a top priority and minimized funds to build a new middle school and to
increases in other areas to build two new improve other facilities. The other low-wealth
structures and renovate other buildings to district did not use new money for facilities.
increase space as a prerequisite to One of the high-wealth districts used funds
expanding programs. Two other low- to upgrade school facilities.
wealth districts refurbished buildings,
and another district improved high school
science labs and established new computer
labs. There were no dramatic changes in
facilities in the middle-wealth and high-
wealth districts.

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Materials and Resources
Low-wealth districts in all three states devoted additional funds to materials
and resources in support of their regular instructional programs. Expenditures for
technology, an area often emphasized in state education reform efforts, were a
priority in many districts. Other districts increased purchases of ancillary materi-
als in support of new text series that incorporated new approaches to the teaching
of reading, mathematics, and science.
Programs
In all three states low-wealth districts used the additional funds provided by
the finance reforms to increase their program offerings. Most low-wealth dis-
tricts added special programs to enhance the learning of at-risk students. These
programs sometimes extended the school day and at other times extended the
domains in which schools typically operated to include social and health services.
District investments in programs were often in response to the mandates of state
reform or changes in the state assessment program.
Facilities
Finally, low-wealth districts in all three states used some portion of their new
funds to address facilities needs, including the construction of new buildings and
renovation of existing buildings. These investments responded to years of de-
ferred maintenance and unmet facilities needs, as well as a need to house new
students and new programs. Districts were most likely to commit new resources
to facilities when they were confronted with enrollment growth and when the
present state of facilities posed barriers to the implementation of new programs
and services.
Summary
Low-wealth districts in all three states used the additional resources they received
to increase salaries and personnel, to augment staff development efforts, to add
new technology and other resources, to implement new programs, and to refur-
bish old facilities and build new ones. In making these decisions, district leaders
were responding to multiple forces, including enrollment growth and new state
standards and requirements. At a time in the early 1990s when states were
beginning to develop performance standards and loosen the regulations on how
monies could be spent, we might have anticipated that the confluence of these
developments would lead districts to use dollars differently to maximize perfor-
mance. However, it appears that at least in this early stage the spending norms

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MARGARET E. GOERTZ AND GARY NATRIELLO
were so strong that departures from the patterns of spending evident in higher-
performing neighboring districts were not seriously entertained.
IMPLICATIONS FOR POLICY AND RESEARCH
In this concluding section, we consider the implications of our findings for
the design of new school finance systems, and for research on the impact of
finance reform policies. We identify four key themes drawn from our analyses of
finance reform in Kentucky, New Jersey, and Texas. We suggest that despite
differences in local contexts, district spending patterns become more similar in
the wake of reform. We note that, in addition to the level of funding, the per-
ceived stability of funding affects spending decisions in local districts. We
consider both the need for and the limitations of linkages between state education
reform plans and state finance plans. Finally, we identify areas in which addi-
tional research might advance efforts to develop school finance policies that lead
to school improvement.
Context and Consistency
Local district responses to finance reform can be characterized in terms of
two superficially contradictory trends. Local districts in these three states were
influenced by local contextual issues in distributing the additional resources made
available through finance reform. At the same time, these new local allocation
decisions resulted in patterns of resource utilization that were quite consistent
from district to district. How can both these trends be true?
Local districts react to a host of local, state, and national contextual factors in
shaping their decisions on the allocation of resources in the wake of finance
reforms. District responses to increases or decreases in funding are influenced by
the following: other state education policies, particularly in the areas of curricu-
lum, assessment, and accountability; demographic trends in the districts (e.g.,
enrollment changes, changes in the composition of the student body); local gov-
ernance structures; and the status of education programs in the districts. Al-
though there was relative consistency in the way districts used new resources,
particular allocation decisions were driven by particular local configurations of
needs. For example, districts that had neglected their facilities when funds were
scarce or that had experienced rapid enrollment increases identified facilities as a
major priority for new expenditures. Districts with less severe and immediate
facilities problems were able to devote more of the new dollars to program
enhancements. At times facilities needs restricted program development, as when
districts found themselves unable to offer full-day kindergarten or pre-kindergar-
ten because they lacked physical space for more classes of students.
If districts are responding to local contextual issues in the allocation of
resources, how do the district-to-district patterns of resource allocation become

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quite similar? Local districts apparently share a similar model of optimal re-
source distribution and utilization. Districts that receive infusions of state aid
look to higher-spending/higher-performing districts for models of how to use
these new dollars. These expenditure models are very traditional: lower class
sizes; improved facilities; and increased professional development, equipment,
and instructional materials. The spending decisions of poor districts were not
capricious. One of the reasons that spending patterns appear similar in all three
states is that districts receiving new funds are modeling their spending decisions
after those of districts deemed to be more successful.
Perhaps the best explanation for this pattern of activity comes from institu-
tional theory. The central project of the new institutionalism is to show how,
independently of efficiency demands, organizations adopt specific forms and
structures to maintain their legitimacy (Powell and DiMaggio, 1991; Rowan,
1982; Tolbert and Zucker, 1983). Regardless of their contribution to organiza-
tional effectiveness, such forms constitute legitimating myths that give organiza-
tions credence, the perception that the organization is doing the right thing, in the
outside world (Meyer and Rowan, 1977). Adoptions for legitimation can come
through three means: coercive isomorphism where pressures are brought to
bear—often through government mandates—to take on certain characteristics,
copying successful organizations in the same field, and normative pressures from
the spread of professionalism (DiMaggio and Powell, 1983). All three of these
can be observed in the case of school finance reform. State governments have
influenced local school districts in their spending patterns through mandates for
certain programs as well as through setting expectations for what constitutes
legitimate expenditures. Local districts do appear to copy well-financed and
more successful (in terms of student outcomes) counterparts in other communi-
ties. Finally, professional staff throughout local districts are influenced by na-
tional professional movements that establish standards for professional practice.
Each of these processes influences the resource allocation decisions in local
districts. However, the efficacy of poor and urban districts adopting the spending
profiles of wealthy and suburban districts remains to be determined.
Dollars and Sense
Local district responses to state finance reform are influenced not only by the
actual changes in the dollars available for education, but also by the ways that
district leaders perceive the probable future of state funding. The change embod-
ied in each reform is a reminder of the dependency of districts, particularly poor
districts, on state actions often beyond their control. To the extent that state
revenues are perceived as unstable and unpredictable, districts avoid new expen-
ditures with long-term commitments. Districts also were deterred from long-
term planning by the perceived instability of state funding.
District responses reflect local perceptions (and realities) of the instability of

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state reform dollars. Therefore, districts are more apt to spend new dollars on
“one-shot” expenditures, like equipment and facilities. Local districts in Ken-
tucky, New Jersey, and Texas experienced a significant change in state policy
with the finance reforms. Consequently, district leaders questioned the stability
of the newly reformed arrangements and avoided long-term resource commit-
ments.
This cautious approach proved prescient in New Jersey and Texas, where
reform laws lasted only two years. The New Jersey legislature modified the
Quality Education Act between its initial passage and implementation, reducing
the amount of aid targeted to the special-needs districts and requiring these
districts to revise their spending plans on short notice. The major provisions of
this amended QEA were in place only 2 years before politics placed the law on
hold and subsequent judicial action required more changes. The Texas school
finance formula was changed three times in 4 years in response to state court
decisions. It is not surprising, then, that one low-wealth Texas district chose to
use 80 percent of its state aid increase on facilities and technology (Picus, 1994).
The perceived instability of state reforms clearly constrains local decisionmaking,
and the effects of such constraints may lead to less than optimum spending
decisions.
Finance Reform and Education Reform
New dollars are put to better use in districts that have a vision and plan for
education reform. Strategic plans for the use of new funds are critical for obtain-
ing the support of taxpayers (especially if a tax increase is required) and for
mediating competing claims for these new resources. Not surprisingly, districts
with strong leadership are more likely to develop these kinds of plans. But states
can help districts identify needs and establish priorities for the use of new state
aid. For example, as part of the New Jersey finance reform, each low-income
district was visited by a team of outside reviewers who prepared a plan containing
a list of priorities. The Kentucky education reform that accompanied that state’s
finance reform contained a great deal of specific guidance regarding the direction
and content of district reform. Similarly, Texas districts used new dollars to
respond to that state’s class size and assessment and accountability policies.
Despite these examples of state actions to assist districts in shaping a vision
for school reform, the relationship between finance reform and education reform
remained separate at the state level in Kentucky, New Jersey, and Texas. No
attempts to directly link state standards to foundation level funding emerged,
even in Kentucky where education reform and finance reform occurred simulta-
neously. It is perhaps not surprising, then, that researchers did not find many
examples of standards-driven resource allocation decisions at the local level be-
yond generalized responses to state and national curriculum reform standards,
such as aligning curriculum and purchasing related instructional materials. Where

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there were some examples of linkages between finance reform and education
reform, as in Kentucky, they were in response to categorical funding for things
like preschool and extended day services.
As states move forward, the trade-off between linking finance reform to
education reform and allowing districts sufficient discretion to make appropriate
allocation decisions needs to be made more explicit. There is increasing interest
in connecting finance reform to education reform and using the former to drive
the latter. It is certainly possible to devise finance reform strategies that are
connected to education reform goals; this is the theory behind the use of categori-
cal grants. However, the diversity of local district conditions and contexts re-
quires a host of resource allocation decisions to be made at the local level to
insure the most efficient and efficacious use of resources. The constraints im-
posed by highly specified, state-level finance systems may exact a price in terms
of local district efficiency. The challenge is to design state finance systems that
move local districts in reform directions while allowing for the most efficient and
effective distribution of resources. The danger for prescriptive state finance
systems is that they might achieve control without coordination or without an
appreciation of the local context.
New Dollars and New Data
There is limited research on how and where districts spend new state aid
dollars in the aftermath of major school finance reforms. Further research re-
quires the collection of quantitative data by expenditure function and object
(particularly salaries) and on the numbers and type of staff districts employ.
Current financial reporting procedures obscure the level and type of reform ac-
tivities undertaken at the district and school level (Adams, 1994). Therefore, we
must continue to rely on qualitative data collection to understand what new
dollars buy programmatically, how educators use reform dollars to improve edu-
cational programs, and the factors that districts identify as influencing their re-
source allocation decisions. The development of better program-level accounting
and of school-level finance data should help (Busch and Odden, 1997). But,
because of the complexity of the factors that contribute to spending decisions, no
one decision-making model can predict or explain changes in district expendi-
tures and resource use.
Even with the collection of additional data on school district expenditures, a
number of factors make the determination of “reform dollars” (i.e., dollars in-
tended for reform) difficult. First, comprehensive finance reform involves modi-
fication of more than one aspect of a finance system and makes identification of
the net effects difficult. These multiple modifications at times reinforce a par-
ticular direction and at other times operate inconsistently. Moreover, the multiple
alterations to a system often have different effects in different kinds of local
districts. For example, a reform that adjusts the foundation formula and restruc-

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tures categorical programs may lead to very different outcomes for districts that
have slightly different student populations. Second, changing local circumstances
can check the intended effects of particular elements of a reform. For example,
rapid changes in student enrollment can lead to very different consequences
depending upon the nature of the linkage of funds to enrollments. Third, local
district finance and accounting systems may not have the capacity to track in-
come in terms of “old” and “new” dollars and so may not allow analysts to
reconstruct the connection between new dollars and reform-related expenditures.
All of these factors mean that the concept of “reform dollars” may be more
appropriate as a rhetorical device than useful as an analytic category for tracking
the impact of finance reform.
The research reported in this chapter confirms Kirst’s (1977) finding that
school district administrators use organizational models, rather than rational
microeconomic concepts, in making resource allocation decisions. This is due, in
part, to the limited applicability of these microeconomic models in education. As
Jesse Burkhead noted,
[even] if school administrators had knowledge of or interest in the marginal
productivity of resource inputs . . . it could not be assumed that it would be
possible to secure least-cost combinations, given the institutional rigidities of
mandates and conventional practice. Neither is there a reasonable substitute for
the objective function of profit maximization. Thus the optimization rationale
that underlies production functions in the private sector is inapplicable for ele-
mentary and secondary education (1973:198).
Assessing the impact of changes in state funding on student outcomes will re-
quire researchers and policymakers to identify and track important intermediate
outcomes, such as changes in the size and mix of educational staff, size and
quality of facilities, instructional and student support services, and classroom
curriculum and instruction.
At the moment, the determination that certain intermediate outcomes of
finance reform are important for producing student learning rests on a foundation
of assumptions with varying degrees of support from empirical research. As we
discussed above, movement along the equity dimension drives poor districts to
emulate wealthy districts in their spending patterns. But the determinations as to
whether continued progress toward equity for poor districts will lead to the most
efficient use of new dollars in these districts require consideration of several
factors. First, the efficiency of spending in wealthy districts needs to be deter-
mined through empirical research. Several efforts are now underway (see Guthrie
and Rothstein, Chapter 7 in this volume) to develop different models of efficient
spending that can be related to a definition of adequacy in state school finance. A
second fruitful line of research might be to work from the emerging models of
whole-school reform to develop their implications for resource requirements and
expected outcomes and to determine their relative efficacy in low-wealth dis-

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tricts. Such models were not available to district leaders during the early 1990s
when the new funding discussed here became available. A third approach is to
build on current efforts to formulate the cost differences between rich and poor
districts and determine whether major variations in student or school characteris-
tics create different models of efficiency for rich and poor districts (see Duncombe
and Yinger, Chapter 8 in this volume).
At the moment, the absence of multiple studies that can yield empirical
information in each of these three areas presents a major challenge to evaluations
of the efficiency of current spending patterns in different types of districts. Im-
provements in our understanding of the variations in the nature of schools, stu-
dents, and reform efforts within different states will contribute to the future
models of school spending that can be used as the basis for determinations of
efficiency of both current and new dollars. In the interim, we should exercise
caution in assuming that all district spending patterns are driven by similar forces,
especially in areas characterized by significant economic transitions, residential
instability and demographic changes, or large concentrations of students with
special characteristics or needs that have cost implications.
NOTES
1. The CPRE research was funded by a grant from the U.S. Department of
Education, Office of Educational Research and Improvement (Grant R117-
G10039). CEPA-NJ’s study of New Jersey was funded by the Mellon Founda-
tion, the Pew Charitable Trusts, and the Rockefeller Foundation.
2. See Rose v. Council for Better Education, Inc., 790 S.W.2nd 186 (Ky.
1989) and Abbott v. Burke, 119 N.J. 287 (1990).
3. See Edgewood Indep. Sch. Dist. v. Kirby, No. 362, 516 (259th Dist. Ct.
Tex., 1987), rev’d 761 S.W.2d 859 (Tex. Ct. App., 1988), rev’d 777 S.W.2d 391
(Tex., 1989).
4. The prior funding system used a foundation formula structure, but there
was no required local effort. As a result, there was little wealth-based variation
in the allocation of state aid (Koch and Willis, 1993).
5. A foundation aid formula guarantees that each student’s education is
supported by a state-prescribed amount of money or foundation. School districts
must contribute to this foundation amount, typically by levying a state-established
tax rate. State aid is the difference between the foundation amount and the
district’s required contribution.
6. Guaranteed tax base plans are designed to ensure that every district in a
state can act as though its tax base is the same as some state-set level—a guaran-
teed tax base (GTB). Under this approach, the local school district chooses its
tax rate for education, which is then applied to the GTB and the district’s actual
tax base. State aid is the difference between what would be raised with the GTB
and what can actually be raised from the local tax base.

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7. In 1991-92, the CED—a single or multi-county entity—replaced the
local school district as the source of revenue for the required local contribution
in the foundation formula. The CED generated and distributed this local revenue
to each school district within its boundaries, substantially equalizing the range of
property tax bases in the county. The CED provision was declared unconstitu-
tional by the Texas Supreme Court in 1992 and was replaced with a requirement
that high-wealth districts reduce their per-pupil property wealth to $280,000
(Picus and Toenjes, 1994).
8. For example, the Kentucky legislature had appropriated only $25 mil-
lion for Tier 1 in 1991-92. It raised this appropriation to $150 million for the
1992-94 biennium to fully fund this program (Koch and Willis, 1993).
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